Heavyside v. R., [1996] 2 CTC 2491, 98 DTC 2211 (Informal Procedure)

Beaubier J.T.C.C.: - This matter was heard at Fredericton, New Brunswick on February 13, 1996. The assumptions of the Minister of National Revenue were acknowledged to be correct. The parties filed an Agreed Statement of Facts. The amount of tax alleged payable to the Receiver General for Canada was conceded to be $2,759.50.

The Agreed Statement of Facts, not including the Schedules attached, reads:

1. THAT the Appellant received her husband, Douglas J. Heavyside’s, interest in their principal residence and marital home on the 6th day of June, 1989, a copy of the Transfer is annexed hereto and marked Schedule “A”.

2. THAT on the 27th day of October, 1993 the Appelant’s husband, Douglas John Heavyside, made an assignment in bankruptcy, a copy of which is annexed hereto and marked Schedule “B”.

3. THAT J.G. Touchie & Associates Ltd. were appointed Trustee’s of the estate of Douglas John Heavyside by the Official Receiver on October 28th, 1993, a copy of which is annexed hereto and marked as Schedule “C”.

4. THAT on the 2nd day of August, 1994 Douglas John Heavyside was discharged as a bankrupt by virtue of a Certificate of Discharge, a copy of which is annexed hereto and marked as Schedule “D”.

5. THAT the Appelant herein received Notice of Assessment of tax liability with respect to the transfer of Douglas John Heavyside’s interest to her on September 26th, 1994, a copy of which is annexed hereto and marked as Schedule “E”.

The Assumptions contained in the Reply read:

(a) on or about June 6, 1989, Douglas J. Heavyside (the “Transferor”) transferred a 50 per cent ownership interest in a property located at 117 Blair Street, Riverview, New Brunswick (the “Property”), to the Appellant;

(b) at all material times, the Appellant was married to the Transferor;

(c) prior to the said date of the transfer the Appellant had a 50 per cent ownership interest in the Property, and, as a result of the transfer described in subparagraph 3(a) above, became the sole owner of the Property;

(d) at the time of the transfer referred to in subparagraph 3(a) above, the fair market value of the Property was $53,350.00;

(e) at the time of the transfer the fair market value of the consideration given by the Appellant for the remaining share of the Property was $23,915.50;

(f) as at the said date of the transfers the Appellant had assumed 50 per cent of the mortgage amount of $44,034.00 attached to the Property, and, as a result of the transfer described in subparagraph 3(a) above, the Appellant assumed 100 per cent of the said mortgage;

(g) the consideration amount given by the Appellant constituted an assumption of the remaining 50 per cent portion of the said mortgage in the amount of $22,017.00 and cash of $1,898.50;

(h) the aggregate of all amounts that the Transferor was liable to pay under the Act in or in respect of the taxation year in which the Property was transferred or in any preceding year is $26,783.02.

Argument followed. At issue is the applicability of subsection 160(1) of the Income Tax Act to the Appellant. The portions of particular concern read:

160(1) Where a person has...transferred property...to

(a) the person’s spouse...

the following rules apply:

(d) the transferee and transferor are jointly and severally liable to pay a part of the transferor’s tax under this Part for each taxation year ... in respect of any ... gain from the disposition of, the property so transferred ... and

(e) the transferee and transferor are jointly and severally liable to pay under this Act an amount equal to the lesser of

(i) the amount, if any, by which the fair market value of the property at the time it was transferred exceeds the fair market value at that time of the consideration given for the property, and

(ii) the aggregate of all amounts each of which is an amount that the transferor is liable to pay under this Act in or in respect of the taxation year in which the property was transferred or any preceding taxation year,

but nothing in this subsection shall be deemed to limit the liability of the transferor under any other provision of this Act.

The Appellant’s argument is simple: she relies on the reasoning of Bell J.T.C.C. in Caplan v. Minister of National Revenue (sub nom. Caplan v. R.), [1995] 2 C.T.C. 2932, 95 D.T.C. 709 (T.C.C.). In that decision, Judge Bell stated:

The equivalent legislation, as it applied to transfers of property occurring before November 13, 1981 read, as to its pertinent portions, as follows:

(1) Where a person has ... transferred property, either directly or indirectly ... to

(a) his spouse

(d) the transferee and transferor are jointly and severally liable to pay the lesser of

(i) any amount that the transferor was liable to pay under this Act on the day of the transfer...

[Emphasis added.]

It has been established that a taxpayer’s debt is created by his taxable income, not by an assessment or reassessment (R. v. Simard-Beaudry Inc., 71 D.T.C. 5511). The result is that a taxpayer is liable for tax in respect of a taxation year even though the Minister of National Revenue has not assessed it.

Section 160 now provides that a transferee is, subject to defined limitation, liable to pay an amount of tax which the transferor is liable to pay... in or in respect of the taxation year in which the property was transferred. Assuming that the transferor did not become bankrupt, the transferee is liable to pay an amount that the transferor is liable to pay in respect of his 1986 taxation year. However, the transferor made an assignment in bankruptcy after 1986. Subsection 178(2) of the Bankruptcy and Insolvency Act provides that, subject to subsection (1), not applicable in this case, an order of discharge releases the bankrupt from all claims provable in bankruptcy. This means that the transferor is not liable for any tax in respect of his 1986 taxation year. Accordingly, the transferee cannot, subsequent to the transferor’s discharge, be liable because the provision is written entirely in the present tense.

The Respondent argued that Judge Bell is wrong. In support of this, the Respondent cited D’Argys v. Minister of National Revenue, [1992] 2 C.T.C. 2778, 92 D.T.C. 1710 (T.C.C.) and Ingrao v. Minister of National Revenue, [1989] 1 C.T.C. 2052, 89 D.T.C. 42 (T.C.C.). Essentially the Respondent’s position is that subsection 160(1) imposes liability on the transferee in respect to the year in which the transfer takes place.

The Income Tax Act imposes liability on the transferor. If a transferor becomes bankrupt, Sections 91, 92 and 100 of the Bankruptcy and Insolvency Act contain provisions respecting transfers or settlements of property by a bankrupt to a spouse prior to the bankruptcy. These provisions benefit all of the bankrupt’s creditors, including the Minister of National Revenue.

The result of the amendment to section 160 as discussed by Judge Bell in Caplan is that a transferee may be liable. But if the bankrupt spouse does not have to pay the income tax in question, then the transferee does not have to pay either. A bankrupt is only discharged and released from paying any of the bankrupt’s debts after what amounts to an investigation of any transfers or settlements such as the one before this Court and an adjudication respecting that and the circumstances and means of the bankrupt.

The change in section 160 of the Income Tax Act which restricts the liability of the transferee to an amount that the transferor is liable to pay appears to restrict the transferee’s liability to pay to that of the transferor if the transferor becomes bankrupt. That is because if there is a good reason why the transferor should pay, then a bankruptcy proceeding will cause the transferor to remain liable to pay. In such a case the transferee spouse will also be liable pursuant to section 160 and will also have to pay whether the bankrupt transferor can pay or not.

In this way the Income Tax Act has adopted whatever determination is made in bankruptcy respecting a spousal transfer of property.

Therefore, the Court adopts the reasoning of Judge Bell contained in Caplan.

The appeal is allowed. The matter is referred to the Minister of National Revenue for reconsideration and reassessment accordingly.

The Appellant is awarded party and party costs.

Appeal allowed.